By Jody Samuels
This article in The Trader’s Indicator Series discusses trend indicators, which is an integral component of the trader’s toolbox and part of many trading systems. The previous article laid out the foundation for what’s to come and discussed an overview of trends and market cycles. In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we will talk about the mechanics of trading.
A trader can use many trend-following strategies to stick with the trend and trigger buys and sells. These trend strategies involve the use of indicators, which are derived from mathematical formulas using historical price and volume data. They are used to anticipate future price changes in order to signal trend reversals or continuations. There are hundreds of indicators being used by traders — many of which you can find under the drop down menu of your trading platform.
Perhaps the most common trend indicators are moving averages. Moving averages can help to define the trend. For instance, when the trend is up, the moving averages are pointed up, and the price action as represented by the candlesticks are tracking above the moving averages. Moving averages are usually described as lagging indicators because they are calculated based on historical price data and price always leads the way before the moving average catches up. Another way to say it is that moving averages get you into the trend after the trend has already changed direction. As a result, the moving averages tell you what prices are currently doing — whether they are rising or falling — but do not warn of any upcoming changes. Notice the moving averages pointed up in the chart below.
A simple moving average crossover strategy involves the crossing of two moving averages such as a 21 period and a 200 period. In theory, when the 21 crosses over the 200 the market is in “Buy” mode, and when the 21 crosses below the 200 the market is in “Sell” mode. The chart below illustrates the change in trend once the shorter moving averages cross over the 200 SMA (simple moving average). However, if you follow this strategy religiously, you will get chopped up during the sideways price consolidation when the averages chop around each other until a clean trend emerges.
Once the clean trend emerges, as evidenced by the shorter moving averages pointed up between 12 and 2pm of a clock face, traders will buy retracements to the averages for trend continuation, also noted in the example. With your trend-following lenses in place, study your charts and find those trends!
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.